Puerto Rico’s Debt Relief to Get Supreme Court Hearing

WASHINGTON — The Supreme Court on Friday agreed to decide whether Puerto Rico, which is in the midst of a financial crisis, may allow public utilities there to restructure $20 billion in debt.

Puerto Rico’s lawyers had urged the court to take immediate action in light of the overall magnitude of the commonwealth’s debts, around $72 billion, which it says it cannot pay.

“Anyone who has even glanced at the headlines in recent months knows that the commonwealth is in the midst of a financial meltdown that threatens the island’s future,” the lawyers wrote in their petition seeking review of an appeals court decision that struck down a 2014 Puerto Rico law allowing the restructurings.

“Because that decision leaves Puerto Rico’s public utilities, and the 3.5 million American citizens who depend on them, at the mercy of their creditors,” the commonwealth’s lawyers wrote, “this court’s review is warranted — and soon.”

The United States Court of Appeals for the First Circuit, in Boston, said the 2014 law, the Recovery Act, was at odds with the federal Bankruptcy Code, which bars states and lower units of government from enacting their own versions of bankruptcy law.

Puerto Rican officials countered that the Recovery Act addressed a gap in the way its debts are treated. Under the Bankruptcy Code, states may authorize their cities, counties, public utilities and other branches of government to restructure their debts under Chapter 9 of the code. But that law excludes all branches of Puerto Rico’s government, including its public utilities. The Recovery Act, Puerto Rican officials said, merely filled the gap in the overall legal structure.

Creditors of the utilities sued, arguing that the Bankruptcy Code displaced, or pre-empted, the local law. So far, the courts have agreed.

Puerto Rico is also seeking help in Congress, calling for an amendment that would give it access to bankruptcy court. Its problems are worsening, and some now argue that restructuring just $20 billion of public utility debt will not be enough.

The Obama administration has proposed a much broader form of bankruptcy, to allow the island to restructure all $72 billion of its bond debt. The Republicans who control both houses have so far shown little support. They have said that such a “super bankruptcy” regime could blaze a trail for distressed states, like Illinois, to follow, profoundly disrupting the credit markets where states and cities now raise their money.

But that is not a reason for the Supreme Court to deny review, the island’s lawyers told the justices.

“Precisely because the crisis facing Puerto Rico’s public utilities is so acute,” they said, “it would be irresponsible for the commonwealth to respond to the vacuum left by the lower courts’ invalidation of the Recovery Act by simply kicking back and crossing its fingers pending this court’s consideration of this petition. Instead, the commonwealth and its public utilities have explored every potential avenue to fill that gap, including federal legislation and consensual deals with creditors.”

Justice Samuel Alito recused himself from the decision, although court documents did not disclose the reason. So the vote will include eight justices, rather than nine.

The cases, Puerto Rico v. Franklin California Tax-Free Trust, No. 15-233, and Acosta-Febo v. Franklin California Tax-Free Trust, No. 15-255, will probably be argued in the spring and decided by the end of June.

Adam Liptak reported from Washington, and Mary Williams Walsh from New York.

A version of this article appears in print on , Section B, Page 3 of the New York edition with the headline: Top Court Will Decide Puerto Rico Debt Cases. Order Reprints | Today’s Paper | Subscribe